Below you find my essay for my application to PPE (Philosophy, Politics and Economics) to Oxford in 2006.

Fixed Book Prices Revisited

Steffen von BünauNovember 1 st 2006

Introduction

The labour market in the industrialized world is shifting towards highly qualified jobs which require profile of the so-called “knowledge worker”. This is not a new development; neither is the term of the knowledge worker, in fact the term was already coined back in 1959 by Peter Drucker. The importance of knowledge has also been known as Winston Churchill predicted: “the empires of the future will be empires of mind”.

However, in the last decade the availability of information has also undergone a substantial shift, influencing the labour market. The internet has made more information available than ever, most of it being free of charge once the internet access is granted. One can estimate the role of the internet in information storage and supply by looking at the development of the gates to the information: companies like Google and Yahoo which core service is to supply mechanisms for finding information are growing rapidly. It is probably fair to say, that thewidespread of information leads to an acceleration in the importance of the knowledge worker. Most recently the survey “War over talent” in “The Economist” highlighted the role of skilled labour, particularly in developed countries.

Not surprisingly with a shift in the nature of labour, there is a shift in the requirements for thatlabour. In relation to the knowledge worker, the most important skill is to work withinformation. This skill is also vital for using the free resources available in the internet. Thekey to the ability to deal with information is, to first of all understand it. Since mostinformation is available in written form this requires the ability to read. However importantthe internet and new media are, most people still learn and improve their reading competencythrough books. It is true that the internet helps gaining equal access to information, but only tothose with matching information skills. Therefore, the medium book plays a crucial part byconveying those skills.

Government intervention in the book market is common in a lot of countries, but it varies inmethods. In Germany, for example, the agreement for fixed book resale prices is rooted in adecision from 1888 by the so called “Boersenverein des deutschen Buchhandels”.Another tool widely used in the EU is a lower VAT rate on books. Extreme cases are Irelandand the UK where VAT on books is completely abolished. The discussion on resale pricemaintenance resumed after the effects of a liberalisation of the book market were observed inthe UK. Resale price maintenance was abolished there in 1995. This change resulted in adecrease in bookshops and an increase in book prices. The reason for the price increase couldalso be a shift towards hardbacks, as the authors of “The economics of Books” Marcel F. M.Canoy, Jan C. van Ours and Fredrick van der Ploeg argue.

In Germany, the interest in book market regulations rose, after the decision of the EuropeanUnion in June 2000 that the German resale price maintenance does not infringe the Europeancompetition law. In October 2006, the weekly newspaper “Die Zeit” published an articleexpressing doubts about the effectiveness of the resale price maintenance. Furthermore, thediscussion is fuelled by other changes in the book market such as the rapid growth of onlineselling and publishing.

In this essay I will analyze the economic consequences of the German resale pricemaintenance and I will try to answer whether the use of resale price maintenance is advisable,especially under new market conditions due to new technology. Before assessing the impactand effectiveness of the „Sammelrevers “(the name of the German rpm) I will give anoverview of its aims.

First of all it is generally agreed that a variety of genres and books has a cultural value, whichmight not be reflected by a corresponding demand in the market. To enable and protectdiversity in the book market, therefore is a vital goal of resale price maintenance. To providea good access to literature, a dense network of quality bookshops is also desirable. The densenetwork of bookshops is not only important under cultural aspects but to support reading.The stimulation of reading is also the motive to keep book prices low: another aim of theresale price maintenance.

The Consequences of Fixed Resale Prices

The advocates of the resale price maintenance argue that cultural diversity would flourish dueto cross-subsidising, allowed by resale price maintenance. Cross-subsidising is the use of highprofits in one sector to allow cheaper prices in another.

A common application of cross-subsidising can be seen in air travel, where seat prices inhigher class earn an extra profits which allows airlines to charge less on the standards seats,then they would have to, if they were offering only standard seats.However there is a keydifference between the air travel market and the book market. In the air travel market, theairline provides the service and can charge its price directly to the consumer.This is somewhat different to book markets. Regardless how promising the prospects of abook are, the publisher still needs to get it into the stores. In a market without resale pricemaintenance, the point is that publishers would come under fierce price pressure in particularfrom the big chains. They would earn less profit and concentrate on those books with verylittle risk, since they want to minimize the risk of unsuccessful books, which they share withthe shops. Now the advantage of resale price maintenance is, that cross-subsidising becomespossible to a greater extent, leading to a greater variety of books published. With the power ofsetting the resale price the publishers can raise the price they charge the book stores, by alsoraising the price the book stores charges the costumer. Without the ability to set the resaleprice, the publisher would possibly have to charge less in order to get the books into the storesat all. The hope is, that the publishers use this extra profit to subsidies riskier books.

Opponents however argue, that publishers do not necessarily use the extra profits to subsidiesbooks of higher risks and cultural value. They might just take the extra profits and continueconcentrating on bestsellers. It is also argued that the concept of cross-subsidising riskierbooks is itself undesirable: the point is, that riskier books are more likely to be of an esotericcharacter which generally is favoured by people with higher education. But people withhigher education also tend to earn more than and less educated people might generally favourbestellers(low risk books). Now those riskier books are subsidised by higher profits frombooks with lower risk. In conclusion, the danger is, that less educated, possibly poorer people,pay higher prices than they would, subsidising books which are read by people of highereducation and higher income.

Furthermore, the loss of price competition due to fixed resale prices is seen as an advantageby the proponents. They hope that bookshops might engage in non-price competition such asproviding better service, general advertising or other activities fostering a culture of reading.Naturally, opponents of the resale price maintenance interpret a lack of freedom as adisadvantage. The argument here is not that the general level of prices could be lower but thatprice discrimination is not possible. The idea behind price discrimination is that differentprices are charged for the same good, not based on different production costs. If possible itmight result in lower prices for pupils or people of old age, like it is common in cinemas ortheatres.

In order to guarantee a high level of geographical availability a dense network of high qualitybookshops is desirable. Resale price maintenance is said to protect individual bookshopsagainst chains, because they cannot be forced out of the market by price competition. This issupported with data from the UK and Germany. In Germany the largest chain Thalia holdsonly three percent of the market whereas 18% of the UK’s market in 1998 is hold by WHSmith. However, this can be seen as a shallow argument since chains get bulk discounts fromthe publishers and therefore can achieve higher profits from each book. More importantly,chains have capacity to also compete in the non-price arena. For example, chains can investmore in stores in better locations with more comfortable interiors or goodies such as freecoffee, newspapers and internet.

The issue of resale price maintenance is a very controversial one, a variety of opinions exists.For example the essay “Resale Price maintenance for Books in Germany and the EuropeanUnion: A Legal and Economic Analysis” by Prof. Dr. Jürgen G. Backhaus and Dr. ReginaldHansen published in the “International Review of Law and Economics” concludes that thecultural affects are “by all means more important than anti-trust aspects” and therefore rpm inthe book market is to support. This is a contrast to “The Economics of Books” by Marcel F.M. Canoy, Jan C. van Ours and Fredrick van der Ploeg whose concluding remarks are morereluctant.

Most scientific articles base their conclusion on the resale price maintenance on theirjudgement of the effects of cross-subsidising. Indeed it is probably the strongest argument oncultural grounds but its impact is doubted.When not taking the cross-subsidy argument into account a majority of arguments standsagainst resale price maintenance of books. In the next section, I will not try to verify or falsifythe argument of cross-subsidising but instead show that its importance is diminishing underchanging conditions.

The World has Changed

Books have a fixed set of standard properties and are easy to send which makes them a verywell sellable over the internet. Online book stores like amazon.com or the online shop ofBarnes &amp; Noble are growing and now move into other goods as well ( “Lifting the Bonnet” 5th Oct. 2006 in “The Economist” ). Since online-selling of books is growing, it is questionable ifbookshops really are the key to adequate book supply.

This trend is likely to continue with younger generations more and more used to purchasegoods over the internet. Of course, actual bookshops still possess certain advantages, probablymost importantly the personal recommendations by qualified staff. But then, this is known toonline shops and they successfully provide sophisticated substitutes. Recommendations in theform of “If you liked this book you’ll like this one” and personal favourite lists compensate the lack of personality to a degree depending on the shopper. Future generations more used toonline shopping might not judge the absence of real personality heavily.I think it is necessary to once again reflect on the cultural aims. Is the aim really just toprovide geographical availability (on which online selling would have a huge impact) or arebookshops as an institutions given a cultural value? Book clubs and literature societies mightgrow around a local shop and definitely be of cultural value. So it needs to be clarified if it issufficient supply chain or actual book shops which shall be supported by the resale pricemaintenance. For simple availability, the need for having a dense network of bookshops is nolonger obvious.

The second influential point also involves the internet, but not on the consumer side. Thebusiness of publishing books is also changes, maybe publicly not as well noticed as thegrowth of online selling. On-demand publishing gives the possibility to publish at low risksand costs. Consequently, authors who might have not passed the former standard examinationprocedure, aimed at reducing risks, might now get their works published.

I am aware of the fact that a book published by an on-demand publisher is unlikely to attractthe same level of publicity as books from conventional publishers with powerful marketingmachinery. But I suspect that this might change as well. The internet has introduced a varietyof new opinion sources like weblogs and forums, and the impact they have is not clear yet. Ireckon that they might become extremely influential. In “The Economics of Books” theimportance of mouth-to- mouth culture in book advertisement is highlighted. I argue that itmight not be wrong to consider weblogs as possible successors or at least as very influentialto the mouth-to- mouth culture in future. This is due to the concept of weblogs involving ahigh level of interaction in comments or votes which creates a strong personal attachment to ablog.

Conclusion

Reconsidering resale price maintenance under these new circumstances makes it easier tocome to conclusion. The main reason on which the resale price maintenance is based -promoting cultural diversity by cross-subsidising - becomes less important. On-demandpublishing and worldwide book purchase should provide a lot of variety.

Under these aspects, I value the arguments against resale price maintenance higher. Forexample, I consider price discrimination as generally beneficial for overall supply of books togroups with different financial resources. However, I believe that government action isneeded, but not so much for promoting diversity but to promote reading directly via stronginvestment in primary education.